Ericsson’s Hot Streak About to End?

by Yuyutsu Sen on October 17, 2011

Swedish telecommunication systems provider Ericsson has been on a hot streak for the last three quarters. The thriving sales were mainly driven by the investments in second generation equipment in China and mobile broadband in the US. But analysts believe that the combination of increased low margin business, cut-throat competition and global slowdown can bring the company’s hot streak to an end.

For more than a year now Ericsson’s single largest market has been North America. But company reports indicate that network capacity investments in the region have begun to slow down. Strong increase in mobile internet and smartphone use were the main drivers of the company’s growth and analysts believe that the trend is dwindling, especially in North America. This can mean the end of strong sales growth trend for the company.

According to WestLB analyst Thomas Langer, the company’s profit margins may start going down as early as this quarter. However, the continuation or change of trend will largely depend on the demand for network upgrade in the coming year. Earlier it has been indicated by the company spokesperson that an increase in low margin business was expected in the later half of 2011 because of base station swap-outs in Europe. This further clouds the company’s position.

In the third quarter, the mobile equipment manufacturer is seen posting $860 million (5.75 billion Swedish crowns) core operating profit excluding joint ventures. Last year the figure stood at 5 billion Swedish crowns in April-June and 5.3 billion in the third quarter. This indicates that for now, the effects of above mentioned factors on the company’s profits are limited. The sales are down by 3% compared to the second quarter, but up by 11.5% year-on-year. In comparison to last year’s gross margin of 38.2%, currently the figure stands at 37%.

With no immediate solution in sight for the debt issues in Europe and the US, the global growth is expected to remain slow. This means lower investments on part of the operators. According to some experts, competition is also getting more intense. Huawei in China is an example of this. Ericsson’s technological edge has allowed it to maintain comparatively higher prices.  But with competitors offering feature rich products at economical rates, the Swedish mobile equipment maker will have to bring down its prices in order to maintain its market share. This means lower margins. The long-term headwinds combined with the firm’s changing business mix can result in its sales growth slowing down sharply in the near future.

In spite of difficult times ahead, some analysts remain positive. According to these experts, investment in additional capacity on part of the operators is likely to continue in spite the global slowdown as the trend of growing connected devices and smartphone use still has a long way to go. Bullish experts point out that the company’s market share has actually gone up over the past year indicating that the pricing pressure has not worsened. They believe that the company’s market position remains strong. 3rd quarter results of the company will be reported at 0530 GMT on the 20th of October and those for rival Nokia Siemens network are also to be announced later in the day.

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